The theory of the firm is a key Higher Level section of the unit on Microeconomics. Although it is theoretical in name, it is highly applicable to the real world in gaining an understanding of how businesses behave (and how governments react) in markets with different levels of competition (different market structures).
Before you begin analysing the various types of market structures it is important that you gain a SOLID understanding of cost, revenue and profit theory. (Please don't confuse revenue with profit from now on!!)
A perfectly competitive market is, as the name suggests, the perfect market structure as the structure results in the most efficient price level for consumers. However, it is often regarded as a purely theoretical structure with a number of markets displaying similiar but not exact characteristics of the market.
A pure monopoly occupies the other extreme end of the spectrum relative to perfect competition in terms of number of competitors (ONE) and degree of competition (NONE). What is of more interest to economists when studying the behaviour of firms is not the actual number of firms in the market but whether one firm is in a position of market (or monopoly) power. Barriers to entry play a key role in determining the long term behaviour of firms in a monopoly and also determine how contestable a market is.
Be aware, that even though monopolists are often criticised for their inefficiency and uncompetitive behaviour, they can be necessary (as in the case of a natural monopoly) or can have objectives other than profit maximisation
Monopolistic Competition is often referred to as imperfect competition as it shares similar characteristics to those of perfect competition.
You should be able to apply market structures to real markets and provide examples on a local, national and global scale. The first class activity is designed to help you do this.
Oligopolies are anything but standard. Some markets may have only a few firms, others may have many. The products on offer in an oligopoly may be homogeneous, e.g. cement or differentiated, e.g. motor vehicles, breakfast cereals. What is of key importance is that the market must be dominated by just a few firms that may or may not require regulation depending on their behaviour.
The theory of the firm is a key Higher Level section of the unit on Microeconomics. Although it is theoretical in name, it is highly applicable to the real world in gaining an understanding of how businesses behave (and how governments react) in markets with different levels of competition (different market structures).
Before you begin analysing the various types of market structures it is important that you gain a SOLID understanding of cost, revenue and profit theory. (Please don't confuse revenue with profit from now on!!)
Cost theory
Test your understanding on cost theory:
Revenue Theory
Profit Theory
Market Structures
Market Structures 1: Perfect Competition
A perfectly competitive market is, as the name suggests, the perfect market structure as the structure results in the most efficient price level for consumers. However, it is often regarded as a purely theoretical structure with a number of markets displaying similiar but not exact characteristics of the market.
Market Structures 2: Monopoly
A pure monopoly occupies the other extreme end of the spectrum relative to perfect competition in terms of number of competitors (ONE) and degree of competition (NONE). What is of more interest to economists when studying the behaviour of firms is not the actual number of firms in the market but whether one firm is in a position of market (or monopoly) power. Barriers to entry play a key role in determining the long term behaviour of firms in a monopoly and also determine how contestable a market is.
Be aware, that even though monopolists are often criticised for their inefficiency and uncompetitive behaviour, they can be necessary (as in the case of a natural monopoly) or can have objectives other than profit maximisation
Market Structures 3: Monopolistic Competition
Monopolistic Competition is often referred to as imperfect competition as it shares similar characteristics to those of perfect competition.
You should be able to apply market structures to real markets and provide examples on a local, national and global scale. The first class activity is designed to help you do this.
Market Structures 4: Oligopolies
Oligopolies are anything but standard. Some markets may have only a few firms, others may have many. The products on offer in an oligopoly may be homogeneous, e.g. cement or differentiated, e.g. motor vehicles, breakfast cereals. What is of key importance is that the market must be dominated by just a few firms that may or may not require regulation depending on their behaviour.
Price discrimination
Market Structures: A summary and comparison
Market Structures: Assessment practice
Document for revision- Market structures- Multiple Choice- Market structures- Multiple Choice.pdf
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